================================================================================

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q



           [X]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
                 THE SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended MARCH 31, 2001.


           [ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
                 THE SECURITIES EXCHANGE ACT OF 1934


                 For the transition period from ____________ to ____________.

                        Commission file number _________



                           EXCHANGE APPLICATIONS, INC.
             -------------------------------------------------------
             (Exact name of registrant, as specified in its charter)


           DELAWARE                                              04-3338916
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

                89 SOUTH STREET, BOSTON, MASSACHUSETTS    02111
               (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code   617-737-2244


--------------------------------------------------------------------------------
                 (Former name, former address and former fiscal
                       year, if changed since last report)


Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  X     No
             ---       ---

State the number of shares outstanding of the registrant's common stock, as of
the latest practicable date.

    Number of Shares 33,546,408                  Outstanding as of May 5, 2001
                                                                   -----------

================================================================================
<PAGE>
                           Exchange Applications, Inc.

               Form 10-Q for the Three Months Ended March 31, 2001


                                Table of Contents



                          PART I. FINANCIAL INFORMATION                    Page
                                                                          Number
Item 1.   Financial Statements (unaudited):

          Consolidated Balance Sheets as of March 31, 2001
          and December 31, 2000                                              3

          Consolidated Statements of Operations for the
          three months ended March 31, 2001 and 2000                         4

          Consolidated Statements of Cash Flows for the
          three months ended March 31, 2001 and 2000                         5

          Notes to Consolidated Financial Statements                         7

Item 2.   Management's Discussion and Analysis of
          Financial Condition and Results of Operation                      10

Item 3.   Quantitative and Qualitative Disclosure
          about Market Risk                                                 17



                           PART II. OTHER INFORMATION


Item 4.   Submission of Matters to a Vote of Security Holders               18

Item 6.   Exhibits and Reports on Form 8-K                                  18


          Signatures                                                        21














                                        2
<PAGE>
                         PART I - FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                  EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE><CAPTION>
                                                                   DECEMBER 31,     MARCH 31,
                                       ASSETS                          2000           2001
                                                                    ----------     ----------
<S>                                                                 <C>            <C>
Current assets:
  Cash and cash equivalents ...................................          8,617          7,072
  Accounts receivable, net of allowance for doubtful accounts .         16,969         12,777
  Prepaid expenses and other current assets ...................          4,270          4,153
                                                                    ----------     ----------
       Total current assets ...................................         29,856         24,002

Property and equipment, net ...................................         10,413         10,391
Non current assets from MicroStrategy Incorporated transaction          42,406         37,500
Goodwill ......................................................         44,980         42,379
Other intangible assets .......................................         24,753         22,224
Other assets ..................................................          9,899          9,728
                                                                    ----------     ----------
       Total assets ...........................................        162,307        146,224
                                                                    ==========     ==========

                  LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
                         STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable ............................................          5,717          4,329
  Accrued expenses ............................................         15,916         15,034
  Current portion of MicroStrategy Incorporated obligation ....         16,833         11,338
  Current portion of note payable to certain former shareholders
    of Customer Analytics .....................................          2,875            415
  Note payable to Insight Capital Partners ....................          1,500          4,249
  Current portion of capital leases ...........................          1,987          2,127
  Deferred revenue ............................................          8,636          8,331
                                                                    ----------     ----------
       Total current liabilities ..............................         53,464         45,823

Long term portion of capital leases ...........................          1,091            601
Long term portion of note payable to certain former shareholders
  of Customer Analytics .......................................          1,965          1,992
Redeemable Convertible Preferred Stock ........................           --            4,362

Stockholders' equity:
  Preferred Stock; $.001 par value--
    10,000,000 shares authorized, zero shares and 5,325,645
    shares outstanding at December 31, 2000 and March 31,
    2001, respectively ........................................           --             --
  Common Stock, $.001 par value--
    150,000,000 shares authorized;  32,970,359 and 33,472,911
    shares issued at December 31, 2000 and March 31, 2001,
    respectively ..............................................             33             34
  Additional paid-in capital ..................................        250,656        258,901
  Accumulated deficit .........................................       (144,502)      (165,199)
  Deferred compensation .......................................           (204)           (89)
  Cumulative translation adjustment ...........................           (196)          (201)
  Treasury stock, at cost; 366,565 shares at March 31, 2001
    and December 31, 2000, respectively .......................           --             --
                                                                    ----------     ----------
       Total stockholders' equity .............................        105,787         93,446
                                                                    ----------     ----------
       Total liabilities and stockholders' equity .............        162,307        146,224
                                                                    ==========     ==========
</TABLE>
                   The accompanying notes are an integral part
                   of these consolidated financial statements.

                                        3
<PAGE>
                  EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
               (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE><CAPTION>
                                                                          THREE MONTHS ENDED
                                                                                MARCH 31,
                                                                         2000             2001
                                                                     ------------     ------------
<S>                                                                  <C>              <C>
Revenues:
  Software license fees .........................................    $     10,262     $      9,045
  Services and maintenance ......................................           4,900            6,715
                                                                     ------------     ------------
       Total revenues ...........................................          15,162           15,760
Cost of revenues:
  Software license fees .........................................             141              203
  Services and maintenance ......................................           3,343            4,514
                                                                     ------------     ------------
       Total cost of revenues ...................................           3,484            4,717
                                                                     ------------     ------------
Gross profit ....................................................          11,678           11,043
Operating expenses:
  Sales and marketing ...........................................           4,841           10,280
  Research and development ......................................           3,212            6,221
  General and administrative ....................................           1,945            4,241
  Amortization of goodwill and intangibles ......................            --              5,130
  Amortization of MicroStrategy non current asset ...............           4,905            4,906
                                                                     ------------     ------------
       Total operating expenses .................................          14,903           30,778
                                                                     ------------     ------------
Loss from operations ............................................          (3,225)         (19,735)
Interest income (expense):
  Interest income ...............................................             475               54
  Interest expense related to capital leases and notes payable ..            --               (256)
  Interest expense associated with the MicroStrategy obligation .            (645)            (339)
                                                                     ------------     ------------
       Total interest income (expense), net .....................            (170)            (541)
                                                                     ------------     ------------
Loss before provision for income taxes ..........................          (3,395)         (20,276)
Provision for income taxes ......................................            --                  6
                                                                     ------------     ------------
Net loss ........................................................    $     (3,395)    $    (20,282)
                                                                     ============     ============
Accretion to redemption value of Series A Redeemable
Convertible Preferred Stock .....................................            --                415
Net loss available to common stockholders .......................    $     (3,395)    $    (20,697)
                                                                     ============     ============
Net loss per common share (Note 2(c)):

Basic net loss per share applicable to common stockholders ......    $      (0.14)    $      (0.63)
                                                                     ============     ============
Diluted net loss per share applicable to common stockholders ....    $      (0.14)    $      (0.63)
                                                                     ============     ============
Basic weighted average  common shares outstanding ...............      25,654,120       32,817,460
                                                                     ============     ============
Diluted weighted average  common shares outstanding .............      25,654,120       32,817,460
                                                                     ============     ============
</TABLE>
                   The accompanying notes are an integral part
                   of these consolidated financial statements.

                                        4
<PAGE>
                  EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
<TABLE><CAPTION>
                                                                    THREE MONTHS ENDED
                                                                         MARCH 31,
                                                                     2000         2001
                                                                   --------     --------
<S>                                                                <C>          <C>
Cash flows from operating activities:

Net loss ......................................................    $ (3,395)    $(20,282)
  Adjustments to reconcile net loss to net cash used
    in operating activities
  Depreciation and other amortization .........................         610        1,305
  Amortization of MicroStrategy asset .........................       4,905        4,906
  Compensation expense associated with stock options ..........          62           31
  Non cash interest expense related to MicroStrategy obligation         645          339
  Non cash interest related to notes payable to Customers
    Analytics shareholders ....................................        --             27
  Non cash interest expense related to notes payable to Insight
    Capital Partners ..........................................        --             74
  Amortization of goodwill and intangibles ....................        --          5,130
  Changes in operating assets and liabilities--
     Accounts receivable ......................................      (1,021)       4,192
     Prepaid expenses and other current assets ................         931          117
     Accounts payable .........................................         590       (1,388)
     Accrued expenses .........................................      (1,591)        (882)
     Deferred revenue .........................................      (2,387)        (305)
                                                                   --------     --------
       Net cash used in operating activities ..................        (651)      (6,736)
                                                                   --------     --------

Cash flows from investing activities:
  Purchases of marketable securities ..........................        (528)        --
  Purchases of property and equipment .........................      (2,491)      (1,151)
  (Increase) decrease in other assets .........................        (149)         171
                                                                   --------     --------
       Net cash used in investing activities ..................      (3,168)        (980)
                                                                   --------     --------

Cash flows from financing activities:
  Proceeds from the issuance of Series A Redeemable Convertible
  Preferred Stock, net of issuance costs ......................        --          4,587
  Proceeds from the issuance of notes payable to Insight
    Capital Partners ..........................................        --          4,432
  Repayments under capital leases .............................        --           (482)
  Repayment of notes payable to Customer Anayltics shareholders        --         (2,460)
  Issuance of common stock under ESPP .........................         209         --
  Exercise of common stock options ............................       1,840           99
                                                                   --------     --------
       Net cash provided by financing activities ..............       2,049        6,176
                                                                   --------     --------
  Effect of exchange rate changes on cash and cash equivalents          (36)          (5)
                                                                   --------     --------
  Net decrease in cash and cash equivalents ...................      (1,806)      (1,545)
                                                                   --------     --------
  Cash and cash equivalents, beginning of period ..............      14,678        8,617
                                                                   --------     --------
  Cash and cash equivalents, end of period ....................    $ 12,872     $  7,072
                                                                   ========     ========
</TABLE>
                   The accompanying notes are an integral part
                   of these consolidated financial statements

                                        5
<PAGE>

<TABLE><CAPTION>
<S>                                                                     <C>             <C>

Supplemental disclosure of cash flow information --
  Cash paid for interest............................................    $       --      $         34
                                                                        ============    ============
  Cash paid for income taxes........................................    $        127    $          6
                                                                        ============    ============

Supplemental disclosure of non cash financing
and investing activities:

In connection with the acquisition of Knowledge Stream Partners
on March 31, 2000, the following non-cash transaction occurred:

  Fair value of assets acquired ....................................    $    (42,769)   $       --
  Fair value of liabilities assumed ................................           2,760            --
  Issuance of common stock and stock options .......................          39,579            --
                                                                        ------------    ------------
  Acquisition costs ................................................    $        430    $       --
                                                                        ============    ============

Effect of beneficial conversion feature on Series A Redeemable
Convertible Preferred Stock.........................................    $       --      $      2,094
                                                                        ============    ============
Issuance of warrants to Insight Capital Partners ...................    $       --      $        257
                                                                        ============    ============
Accretion of dividends and discount on Series A Redeemable
Convertible Preferred Stock.........................................    $       --      $        201
                                                                        ============    ============
Accretion of discount, offering costs, and beneficial conversion
feature on issuance of Series A Redeemable Preferred Stock..........    $       --      $        214
                                                                        ============    ============
Conversion of notes payable to Insight Capital Partners into
Series A Redeemable Convertible Preferred Stock.....................    $       --      $      1,500
                                                                        ============    ============
Equipment acquired under capital lease .............................    $       --      $        132
                                                                        ============    ============
</TABLE>












                   The accompanying notes are an integral part
                   of these consolidated financial statements.

                                        6
<PAGE>
                  EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(1)  BACKGROUND AND BASIS OF PRESENTATION

     Exchange Applications, Inc. and its subsidiaries (the "Company"), doing
business as Xchange Inc., provides Customer Relationship Management ("CRM")
solutions that help companies earn a greater share of their customers' business
through relevant, personalized customer communications. Xchange provides an
open-platform CRM software and services solution that enables clients to
customize offers based on profile information, synchronize offers across all
customer channels in real-time and track the responses. This solution provides
companies with the opportunity to improve their acquisition and retention of
customers and increase customer relationship profitability.

     The Company is subject to a number of risks common to rapidly growing
technology-based companies, including limited operating history, dependence on
key individuals, rapid technological changes, competition from substitute
products and larger companies, high customer concentration, the need for
adequate financing to fund future operations and the need for successful
development and marketing of its commercial products and services.

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (A)  PRINCIPLES OF CONSOLIDATION

     The accompanying consolidated financial statements are unaudited and have
been prepared in accordance with generally accepted accounting principles. These
statements include the accounts of Exchange Applications, Inc. and its wholly
owned subsidiaries.

     (B)  INTERIM FINANCIAL REPORTING

     Certain information and footnote disclosures normally included in the
Company's annual consolidated financial statements have been condensed or
omitted. The interim consolidated financial statements, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the operating results for the
interim periods ended March 31, 2000 and 2001, respectively. The results of
operations for the interim periods are not necessarily indicative of the results
of operations to be expected for the entire year. It is suggested that these
interim consolidated financial statements be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 2000,
which are contained in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on April 17, 2001.

     (C) NET INCOME (LOSS) PER SHARE

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, EARNINGS PER SHARE, basic and diluted net loss per common share for the
three months ended March 31, 2000 and 2001 is calculated by dividing the net
loss applicable to common stockholders by the weighted average number of common
shares outstanding.

                                        7
<PAGE>
                  EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Diluted weighted average shares outstanding for the three months ended
March 31, 2000 and 2001 exclude the potential common shares from stock options,
warrants and Series A Redeemable Convertible Preferred Stock because to include
such shares would have been antidilutive. As of March 31, 2001 and 2001,
5,329,452 and 7,409,581 potential common shares were outstanding.

(D)  COMPREHENSIVE INCOME (LOSS)

     The Company has adopted Statement of Financial Accounting Standards No.
130, REPORTING COMPREHENSIVE INCOME ("SFAS No. 130"). SFAS No. 130 requires that
items defined as other comprehensive income (loss), such as foreign currency
translation adjustments, be separately classified in the financial statements
and that the accumulated balance of other comprehensive income (loss) be
reported separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. The components of comprehensive income
(loss) for the three months ended March 31, 2000 and 2001 are as follows (in
thousands):
                                                     THREE MONTHS ENDED
                                                          MARCH 31,
                                                      2000         2001
                                                    --------     --------
Comprehensive income (loss):                            (IN THOUSANDS)
   Net income (loss) .........................      $ (3,395)    $(20,282)
   Other comprehensive income (loss):
       Foreign currency adjustment ...........           (36)          (5)
       Marketable securities adjustment.......            45         --
                                                    --------     --------
   Comprehensive income (loss) ...............      $ (3,386)    $(20,287)
                                                    ========     ========

(E)  CASH EQUIVALENTS AND MARKETABLE SECURITIES

     Cash equivalents are short-term, highly liquid investments with original
maturity dates of three months or less at the date of acquisition. Included in
cash and cash equivalents is $2,361,500 of restricted cash currently used to
collateralize outstanding letters of credit. Cash equivalents are carried at
amortized cost, which approximates fair market value. The Company accounts for
marketable securities in accordance with SFAS No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. The Company's short-term and
long-term marketable securities are classified as available-for-sale and are
recorded at fair value with any unrealized gain or loss recorded as an element
of stockholders' equity. As of December 31, 2000 and March 31, 2001, the Company
had no investments in marketable securities.

(3)  NOTES PAYABLE TO INSIGHT CAPITAL PARTNERS

     On February 20, 2001, the Company issued a 9% Bridge Promissory Note (the
"February Note") and a warrant to purchase up to 108,877 shares of the Company's
common stock (the "February Warrant") to four funds affiliated with Insight
Venture Associates IV, L.L.C (collectively "Insight") for an aggregate purchase
price of $3.0 million. The February Warrant is exercisable at any time after
April 30, 2001 and on or prior to February 15, 2011 at an exercise price of
$2.7554 per share. Approximately $112,600 of the proceeds of the February Note
have been allocated to the value of the February Warrant which has been recorded
in Additional Paid in Capital. The resulting discount is being amortized over
the period from issuance to maturity on April 30, 2001.

                                        8
<PAGE>
     On March 28, 2001, the Company issued a 10% Bridge Promissory Note (the
"March Note") and a warrant to purchase up to 294,118 shares of the Company's
common stock (the "March Warrant") to Insight for an aggregate purchase price of
$1.5 million. The March Warrant is exercisable at any time after June 2001 and
on or prior to March 28, 2011 at an exercise price of $1.53 per share.
Approximately $144,600 of the proceeds of the February Note have been allocated
to the value of the February Warrant which has been recorded in Additional Paid
in Capital. The resulting discount is being amortized over the period from
issuance to maturity on May 28, 2001.

(4)  REDEEMABLE CONVERTIBLE PREFERRED STOCK

     In January 2001, the Company designated 5,330,000 shares of its authorized
Preferred Stock, $.001 par value, as Series A Convertible Redeemable Preferred
Stock ("Series A Preferred Stock"). The Company issued 5,325,645 shares at a
purchase price of $1.2628 per share resulting in gross proceeds of $6,725,245
including $1,500,000 note payable to Insight Capital Partners. Each share of
Series A Preferred Stock accrues cumulative dividends at a rate of 10% per
annum. The holders of the Series A Preferred Stock may require the Company to
redeem outstanding shares at any time after January 10, 2004 for an amount equal
to a 3% premium over the purchase price per share and all accrued and unpaid
dividends. Each share of Series A Preferred Stock is convertible into the number
of shares of the Company's common stock equal to the initial purchase price plus
all accrued and unpaid dividends divided by the Conversion Price ($1.2628). The
conversion is subject to adjustment for certain dilutive events, as defined.

     In connection with the issuance of the Series A Preferred Stock, the
Company has recorded a $2.1 million beneficial conversion feature of the Series
A Preferred Stock as a reduction to the carrying value of the Series A Preferred
Stock and as a contribution of capital to additional paid in capital. The
resulting discount on the Series A Preferred Stock will be accreted over the
period from issuance to the first redemption date of the Series A Preferred
Stock. During the three months ended March 31, 2001, the company recorded
accretion of dividends of $201,000. In addition, the Company recorded $214,000
of the accretion of the discount on the Series A Preferred Stock.

(5)  SUBSEQUENT EVENTS

     (A) ADDITIONAL FINANCING

     On April 16, 2001, the Company received an undertaking letter from Insight
which included the following terms:

     o   Insight will refinance the February Note and the March Note with a new
         $4.5 million promissory note (the "New Note") which bears interest at
         12% per annum and matures on January 15, 2002

     o   If the Company requires additional financing to support its ongoing
         business operations, Insight has agreed to provide up to $13.5 million
         of additional financing (the "Additional Financing"). The Additional
         Financing will be available at any time from April 16, 2001 through the
         earlier of December 31, 2001 or the consummation of a "Sale of the
         Corporation", as defined in the Company's Series A Preferred Stock
         documents. Subject to the terms of the undertaking letter, the
         Additional Financing will be available provided that the Company has
         used its best efforts to obtain financing from other investors and has
         not been successful in obtaining such financing. The terms of the
         Additional Financing will be negotiated in good faith at the time the
         financing is provided, but in no event will any debt securities
         purchased by Insight have a maturity prior to January 15, 2002.

     In connection with the above, the Company has agreed to issue a new warrant
for the purchase of 681,818 shares of the Company's common stock (the
"Replacement Warrant"), which replaces the February and March Warrants. The
Replacement Warrant is exercisable at any time prior to ten years from the date
of issue at an exercise price equal to the lowest closing price per share of the
Company's common stock between February 20, 2001 and the earliest of (x) the
date of exercise of the Replacement Warrant, (y) the date of repayment of the
New Note and (z) the date of conversion of all of the obligations outstanding
under the New Note. In connection with the Additional

                                        9
<PAGE>
Financing, the Company issued a warrant (the "Additional Financing Warrant") for
the purchase of a minimum of 818,182 up to a maximum of 1,519,091 of the
Company's common shares. The actual number of shares will be determined based on
the duration that the financial commitment remains in place. The warrants have
an exercise price equal to the lowest closing price per share of the Company's
common stock from April 16, 2001 until the earlier of (a) the date of first
exercise of the Additional Financing Warrant and (b) the earliest of (i)
December 31, 2001, (ii) the date that Insight obligations, if any, with respect
to the Additional Financing, terminate due to notification from the Company to
that effect and (iii) the date of the consummation of a "Sale of the
Corporation" as defined in the Company's Series A Preferred Stock documents. The
Additional Financing Warrant expires on April 16, 2011.

     (B) BANK FACILITY

     In April 2001, the Company entered into a $5.0 million secured credit
facility with a bank. Availability under the credit facility is based on a
percentage of the Company's eligible receivables as defined. Borrowings under
the credit facility bear interest at the banks prime rate plus 2%. Under the
terms of the agreement, the Company must maintain at least $2.0 million of
excess availability or cash and investments at all times.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

     THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. EXCHANGE APPLICATIONS' ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS FORM 10-Q.

OVERVIEW

     Exchange Applications, Inc. and its subsidiaries (the "Company"), doing
business as Xchange Inc., provides Customer Relationship Management (CRM)
solutions that help companies earn a greater share of their customers' business
through relevant, personalized customer communications. The Company provides an
open-platform CRM software and services solution that is designed to help
clients customize offers based on profile information, synchronize offers across
multiple customer channels in real-time and track the responses. This solution
is designed to provide companies with opportunities to improve their acquisition
and retention of customers and to increase customer relationship profitability.
The Company's CRM solutions are licensed for use at approximately 290 client
sites in 33 countries, as well as the six leading U.S. marketing service
bureaus.

     CORPORATE OVERVIEW

     The Company was incorporated in November 1996. Prior to incorporation, the
Company operated as a separate division of two entities, Grant & Partners, Inc.
("GPI") and Grant & Partners Limited Partnership ("GPLP"). The Company's
activities during its early stages of operation focused on the development of
software solutions to provide customer communications support to businesses. In
1995, the Company began providing professional services in the areas of
marketing program design and execution and data warehousing. In March 1997, the
Company ceased providing marketing program design services. The Company's
development efforts culminated in the introduction to the market in July 1996 of
the first module of the Xchange Dialogue product family, the Company's marketing
automation software product. Since this initial introduction of Xchange
Campaign, the Company has continued to focus significant resources on the
development of additional functionality and features of the Xchange Dialogue
suite as well as the development and acquisition of additional solutions within
the Company's CRM solution set including Xchange Real Time, Xchange EnAct, and
the email marketing and analytic modules of the Xchange Dialogue suite. The
Company also has continued to expand its marketing activities, build the Xchange
identity, develop the competencies of the professional services group, build
international sales and distribution channels and develop its general and
administrative infrastructure. The Company has shifted its primary business

                                       10
<PAGE>
focus from providing services to selling software products. However, the Company
believes that continuing to provide superior professional services will be
critical to maximizing its opportunities for future revenues.

     In August 1999, the Company acquired eXstatic Software, Inc. (formerly
known as Gino Borland, Inc.) ("eXstatic") in a transaction accounted for as a
pooling of interest. eXstatic develops and markets software products that enable
businesses to plan, create and execute highly personalized, permission-based
email communications based on customer profiles. In March 2000, the Company
acquired Knowledge Stream Partners, Inc. ("KSP") in a transaction accounted for
under the purchase method. KSP specializes in consulting and software
development for advanced data mining and online/offline analytics. Most
recently, in June 2000, the Company acquired Customer Analytics, Inc. ("CA") in
a transaction accounted for under the purchase method. CA develops and markets
campaign management solutions focused on creating, executing, analyzing and
measuring customer communications at the local or branch level.

     The Company generates revenue from software licenses, professional service
arrangements and software maintenance agreements. The Company recognizes revenue
based on the provisions of Statement of Position, (SOP), No. 97-2, SOFTWARE
REVENUE RECOGNITION, as amended by SOP No. 98-4 and SOP No. 98-9, and the
provisions of SOP No. 81-1, ACCOUNTING FOR PERFORMANCE OF CONSTRUCTION-TYPE AND
CERTAIN PRODUCTION-TYPE CONTRACTS.

     Software license fee revenues are generated from licensing the rights to
the use of the Company's packaged software products. Services and maintenance
revenues are generated from sales of maintenance, consulting, training and
hosting services performed for customers that license the Company's products.
The Company has concluded that effective with the new generation of Xchange
Dialogue products released in the third quarter of 2000, certain of the
implementation services related to the Dialogue product suite are essential to
the customer's use of the packaged software products. Similarly, the
implementation services for the Company's Xchange Real Time and Xchange EnAct
products are essential to the customer's use of those packaged software
products. For sales of these products where the Company is responsible for
services that are critical to the functionality of the software, the Company
recognizes revenue for these arrangements following the percentage-of-completion
method over the implementation period. Percentage of completion is measured by
the percentage of implementation hours incurred to date compared to estimated
total implementation hours. This method is used because management has
determined that past experience has shown expended hours to be the best measure
of progress on these engagements. In situations where the Company is not
responsible for such services deemed to be essential to the customer's use of
the software, the Company recognizes revenue on delivery of the packaged
software if there is persuasive evidence of an arrangement, collection is
probable, the fee is fixed or determinable and vendor-specific objective
evidence exists to allocate the total fees to all undelivered elements of the
arrangement.

     Vendor-specific objective evidence is based on the price charged when an
element is sold separately or, in the case of an element not yet sold
separately, the price established by authorized management, if it is probable
that the price, once established, will not change before market introduction.
Elements included in multiple-element arrangements could consist of software
products, maintenance, consulting and training services.

     Revenue from maintenance services is recognized ratably over the term of
the contract, typically one year. Professional services revenue is primarily
related to implementation and consulting services performed on a
time-and-materials basis under separate service arrangements. Revenues from
professional service arrangements are recognized on either a time and materials
or percentage-of-completion basis as the services are performed, provided that
amounts due from customers are fixed or determinable and deemed collectible by
management. In addition, the Company recognizes services revenue for its
application hosting service. The revenue is recognized over the service delivery
period based on either a pre-determined monthly service fee or a usage based
pricing model.

     In certain situations, the Company may enter into transactions with third
parties to acquire technology from those entities at the same time that the
Company sells its technology to those same third parties. In those instances,
the Company applies Accounting Principles Board Opinion No. 29, ACCOUNTING FOR
NONMONETARY TRANSACTIONS, and Emerging Issues Task Force Issue (EITF) No. 86-29,
NONMONETARY TRANSACTIONS: MAGNITUDE OF THE BOOT AND THE EXCEPTIONS TO THE USE OF
FAIR VALUE, to such transactions.

                                       11
<PAGE>
     Through June 30, 2000 the Company had experienced significant quarterly
revenue growth. However, due to a number of factors, including poor sales
execution in the third quarter and the impact of contract accounting on certain
of the transactions signed in the third and fourth quarter of 2000, the Company
realized a decline in quarterly revenue from the second to the third quarter of
2000, as well as a decline in revenues in the second half of 2000 as compared to
the first half of 2000. There can be no assurance that we will be able to
achieve or sustain growth in the future, and our past performance should not be
relied upon. Many of the Company's latest generation of products, released in
the second and third quarter of 2000, have a high dependency on services for
delivery of the solution. The Company has concluded that the implementation
services are essential to the customer's use of the packaged software products
in certain arrangements where the Company is responsible for implementation
services and therefore will be accounting for those contracts under the contract
accounting method as the services are performed. Variability in the delivery
cycle of product implementation services, combined with the Company's lengthy
and variable sales cycle may make predictability of license revenue more
difficult. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in the early stage
of development, particularly in new and rapidly evolving markets. There can be
no assurance that the Company will be successful in addressing such risks and
difficulties or that it will be able to achieve or sustain increasing revenues.

     In April 2001, the Company instituted a plan of corporate restructuring
under which it eliminated 72 positions across its operations, representing
approximately 15% of the total employee base. The Company will incur
restructuring costs of approximately $750,000 in the second quarter of 2001
related to severance payments to terminated employees. Additionally, the company
is currently evaluating the appropriateness of additional non-cash impairment
charges for certain of its long-term assets as a result of this restructuring.


                                  RISK FACTORS

     Statements in this report concerning the future results of operations,
financial condition and business of the Company are "forward-looking" statements
as defined in the Securities Act of 1933 and the Securities Exchange Act of
1934. Investors are cautioned that information contained in these
forward-looking statements is inherently uncertain, and that actual performance
and results may differ materially due to numerous risk factors, including but
not limited to the following: LIMITED OPERATING HISTORY MAKES EVALUATING OUR
BUSINESS DIFFICULT; RECENT EVENTS WILL RESULT IN SHORT TERM LOSSES; QUARTERLY
OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND INVESTORS SHOULD NOT RELY ON
THEM TO PREDICT OUR FUTURE PERFORMANCE; OUR BUSINESS MAY SUFFER IF OUR SOLUTIONS
ARE NOT ACCEPTED BY NEW CUSTOMERS; WE DEPEND ON A FEW INDUSTRIES FOR MOST OF OUR
SALES, AND WE MAY NOT BE SUCCESSFUL IN EXPANDING BEYOND THOSE LIMITED MARKETS;
THE LOSS OF ONE OF OUR LARGEST CUSTOMERS COULD CAUSE OUR REVENUES TO DROP
QUICKLY AND UNEXPECTEDLY; WE NEED TO MANAGE OUR GROWTH OR EFFECTIVELY OR WE MAY
NOT SUCCEED; OUR BUSINESS WILL NOT GROW IF WE DO NOT KEEP PACE WITH RAPIDLY
CHANGING TECHNOLOGIES; OUR STOCK PRICE OR OUR BUSINESS COULD BE ADVERSELY
AFFECTED IF WE ARE NOT ABLE TO EFFICIENTLY INTEGRATE ACQUISITIONS; COMPETITION
COULD REDUCE OUR MARKET SHARE AND HARM OUR BUSINESS; IF WE DO NOT SUCCESSFULLY
MAINTAIN OUR RELATIONSHIPS WITH INDIRECT DISTRIBUTION CHANNELS, OUR SALES COULD
DECLINE OR COULD GROW MORE SLOWLY THAN EXPECTED; WE HAVE A LIMITED ABILITY TO
PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND OTHERS COULD INFRINGE ON OR
MISAPPROPRIATE OUR PROPRIETARY RIGHTS; IF WE DO NOT SUCCESSFULLY GROW AND MANAGE
OUR INTERNATIONAL OPERATIONS, OUR BUSINESS WILL SUFFER; CURRENCY FLUCTUATIONS
AND GENERAL ECONOMIC CONDITIONS IN OUR FOREIGN MARKETS MAY IMPACT OUR CUSTOMERS'
SPENDING AND THE VALUE OF MONEY OWED TO US; OUR FOUNDERS, OFFICERS AND PRINCIPAL
STOCKHOLDERS HAVE SUBSTANTIAL CONTROL OVER OUR VOTING STOCK AND HAVE THE ABILITY
TO MAKE DECISIONS THAT COULD ADVERSELY AFFECT OUR STOCK PRICE; WE MAY BE SUBJECT
TO FUTURE PRODUCT LIABILITY CLAIMS OUR COMMON STOCK PRICE IS LIKELY TO BE
VOLATILE AND COULD DROP UNEXPECTEDLY; WE HAVE ADOPTED ANTI-TAKEOVER PROVISIONS
THAT COULD AFFECT THE MARKET PRICE OF OUR COMMON STOCK OR OUR ABILITY TO SELL
OUR BUSINESS. The Company's filings with the Securities and Exchange Commission,
including its Annual Report on Form 10-K for the year ended December 31, 2000,
contain additional information concerning such risk factors.

                                       12
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standard, or SFAS, No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 did
not have a material impact on the Company's consolidated financial statements.

THREE MONTHS ENDED MARCH 31, 2000 AND 2001

     REVENUES

     The Company's total revenues increased 3.9% from $15.2 million in the three
months ended March 31, 2000 to $15.8 million for the three months ended March
31, 2001. Software license fee revenues decreased 11.9% from $10.3 million, or
67.7% of total revenues, in the three months ended March 31, 2000 to $9.0
million, or 57.4% of total revenues, in the three months ended March 31, 2001.
Revenue growth was limited during this fiscal quarter due to several factors,
including (i) delays in completing sales resulting from our efforts to
reorganize our sales and distribution strategy and personnel to effectively sell
our new product and service suite; (ii) our change to a contract accounting
revenue model, and the deferral of revenue recognition on sales booked under
this accounting method; and (iii) fewer sales resulting from the general market
slowdown for information technology. The Company expects revenue to remain flat
through the second quarter of 2001 while it continues to reorganize its sales
and distribution strategy. The Company expects moderate revenue growth to return
after the second quarter as the sales distribution personnel achieve
productivity which will allow for the new products and services to gain market
penetration. As of March 31, 2001, the Company had 29 direct sales
representatives and compared to 22 at March 31, 2000.

     Services and maintenance revenues increased 37.0% from $4.9 million or
32.3% of total revenues, in the three months ended March 31, 2000 to $6.7
million, or 42.6% of total revenues, in the three months ended March 31, 2001.
The growth of services and maintenance revenues was directly attributable to
incremental revenues from the Company's ASP service offering and maintenance
fees from the Company's increased base of customers. The increase in services
and maintenance revenues as a percentage of total revenues was primarily
attributable to the shift to contract accounting for the latest generation of
the Company's products introduced in the third quarter of 2000, the increased
contribution of maintenance fees from the Company's increased base of customers,
as well as the increase in the Company's revenue related to its activity as an
ASP for many of its customers. As the Company looks to strengthen its
relationships with third party software integrators, such as Cap Gemini Ernst &
Young, IBM Global Services, and PriceWaterhouseCoopers it is expected that we
will see a shift in some of the services work historically performed by the
Company to these third party integrators. However, the Company expects to
continue the expansion of its service offerings to include newly identified
opportunities as well as projects that require unique expertise or familiarity
with the Company's CRM solution set. In addition, the Company's second
generation Xchange Dialogue product set as well as the Xchange Real Time and
Xchange EnAct offerings have a high dependency on professional services for
successful deployment. While many of these services will be performed by systems
integrators, it is expected that a sufficient amount of domain specific services
work will be delivered by the Company such that the overall mix of software and
services as a percentage of total revenues should remain the same over the
foreseeable future.

                                       13
<PAGE>
     For the three months ended March 31, 2001, the Company's top five customers
accounted for 49.6% of total revenues as compared to 59.0% of total revenues for
the three months ended March 31, 2000. None of the top five customers during the
three months ended March 31, 2001 were top five customers during the three
months ended March 31, 2000. The two largest customers during the three months
ended March 31, 2001 represented 25.2% and 8.8% of total revenues, respectively,
while the two largest customers for the three months ended March 31, 2000
represented 33.8%, and 8.1%, respectively, of the Company's total revenues.

     Revenues from customers outside North America were $3.1 million for the
three months ended March 31, 2001, representing approximately 19.5% of total
revenues as compared to $3.4 million or approximately 22.3% of total revenues
for the comparable period in the prior year.

     COST OF REVENUES

     Total cost of revenues as a percentage of total revenues increased from
23.0% in the three months ended March 31, 2000 to 29.9% in the three months
ended March 31, 2001.

     Cost of software license fees consists primarily of royalty payments made
to third parties for licensed intellectual property and amortization of acquired
technology costs included in the Campaign products, and costs associated with
software packaging and distribution. Cost of software license fees increased
from $141,000 or 1.4% of total software license fee revenue for the three months
ended March 31, 2000 to $203,000 or 2.2% of total software license fee revenue,
for the three months ended on March 31, 2001. The increase in cost of software
license fees from 2000 to 2001 resulted from an incremental $164,000 in third
party royalties for components of the Xchange Enact software product released in
the first quarter of 2001. As the Company adds additional components to its
software products, the Company may choose to license software from third
parties. The cost of such licenses may increase the cost of software license
fees in absolute dollars, however, the Company believes that cost of software
license fees will remain the same or decrease slightly as a percentage of
software license revenues in the foreseeable future.

     The Company's cost of services and maintenance consists primarily of
personnel, facility and system costs incurred in providing professional
consulting services, training, hosted software services for the Xchange
eMessaging software product, and customer support services. Cost of services and
maintenance revenues as a percentage of total revenues increased from 22.1% for
the three months ended March 31, 2000 to 28.6% for the three months ended March
31, 2001. The increase in cost of services and maintenance revenue as a
percentage of total revenue is attributable primarily to the increase in the
contribution of services as percentage of total revenue during the three months
ended March 31, 2001 compared to the three months ended March 31, 2000. Cost of
services and maintenance as a percentage of services and maintenance revenues
was 68.2% and 67.2% for the three months ended March 31, 2000 and 2001,
respectively.

     Overall gross margin decreased from 77.0% for the three months ended March
31, 2000 to 70.1% for the three months ended March 31, 2001, due primarily to
increased contribution of services revenue to the overall revenue mix.

     OPERATING EXPENSES

     SALES AND MARKETING. The Company's sales and marketing expenses consist
primarily of salaries for sales and marketing personnel, commissions, travel and
promotional expenses. For the three months ended March 31, 2000 and 2001, sales
and marketing expenses were 31.9% and 65.2% of total revenues, or $4.8 million
and $10.3 million, respectively. This increase in expense is primarily
attributable to the increase in personnel, promotional activities including
trade shows, seminars, and the development of promotional materials designed to
increase awareness of the Company and its products. The number of employees in
the Company directly involved in the sales and marketing effort has increased
from 71 at March 31, 2000 to 141 at March 31, 2001. The investment in sales and
marketing personnel and activities has contributed to the expansion of the
customer installation base to over 290

                                       14
<PAGE>
locations and 33 countries. As the Company expands its business into new
vertical markets and continues the expansion internationally into Europe and the
Asia/Pacific region, the Company expects to continue to invest resources in the
sales and marketing arena. In order to achieve the revenue growth targets in the
future we will continue to invest in sales and marketing efforts and anticipate
an increase in total spending in 2001 as compared to historical periods. This
fact, combined with the shift to contract accounting for many of the Company's
software transactions, and the resulting slower year over year revenue growth
rates as compared to prior periods, will result in sales and marketing expenses
being higher as a percentage of total revenue in 2001 as compared to levels in
prior years. In April 2001,in connection with the Company's corporate
restructuring, the company eliminated 17 positions, or 12% of total sales and
marketing headcount, from the sales and marketing function.

     RESEARCH AND DEVELOPMENT. The Company's research and development expenses
consist primarily of employee salary and benefits, consultant costs, and
equipment and purchased software depreciation costs associated with new product
development, enhancement of existing products and quality assurance activities.
For the three months ended March 31, 2000 and 2001, research and development
expenses were 21.2% and 39.5% of total revenues, or $3.2 million and $6.2
million, respectively. This increase in absolute dollars was primarily the
result of the increase in the number of personnel dedicated to research and
development from 96 at March 31, 2000 to 169 at March 31, 2001 as the Company's
product offering grew from two products in 2000 to five products in 2001.
Research and development expense increased as a percentage of total revenue as a
result of the increased investment in research and development of the Xchange
Dialogue product suite, the Xchange Real Time product, and the Xchange EnAct
product coupled with the flat revenue growth quarter over quarter from March 31,
2000 to March 31, 2001. In April 2001, as a part of a corporate restructuring,
28 positions were eliminated from the research and development function
primarily related to the Company's Xchange eMessaging product. As the Company
continues to commit substantial resources to enhancing existing product
functionality and to developing new products, it is expected that research and
development expenditures will be approximately 30-35% of total revenue for the
foreseeable future.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $1.9, or 12.8% of total revenues, for the three months ended March 31, 2000
to $4.2 million, or 26.9% of total revenues, for the three months ended March
31, 2001. The increase in absolute dollars was the result of the increase in the
number of personnel dedicated to its finance, information systems, and human
resource departments from 43 at March 31, 2000 to 90 at March 31, 2001. In April
2001, the Company eliminated 12 positions or 16% of total general and
administrative headcount in connection with its corporate restructuring. Going
forward, the Company expects general and administrative expenses to decrease
both in absolute dollars and as a percentage of total revenue.

AMORTIZATION EXPENSE

     Amortization expense for the three months ended March 31, 2001 was
approximately $10.0 million consisting of $5.1 of amortization of goodwill and
other intangible assets acquired in the acquisitions of KSP in March 2000, and
CA in June 2000 and $4.9 million of amortization of the MicroStrategy investment
acquired in December 1999. Amortization expense for the three months ended March
31, 2000 was approximately $4.9 million consisting of amortization of the
MicroStrategy investment acquired in December 1999.

INTEREST INCOME (EXPENSE), NET

     Net interest expense increased from $170,000 for the three months ended
March 31, 2000 to $541,000 for the three months ended March 31, 2001. Interest
expenses decreased from $645,000 for the three month ended March 31, 2000 to
$595,000 for the three months ended March 31, 2001. Interest expense during the
three months ended March 31, 2000 consisted entirely of non-cash interest
associated with the MicroStrategy obligation. During the three months ended
March 31, 2001, interest expense was comprised of $339,000 of non-cash interest
associated with the MicroStrategy obligation, $74,000 of non-cash interest
associated with the amortization of discounts on the issuance of $4.5 million of
convertible notes to Insight Capital Partners, $30,000 in interest payable on

                                       15
<PAGE>
convertible notes payable to Insight Capital Partners, $64,000 in interest on
notes payable to certain former shareholders of Customer Analytics, as well as
$88,000 in interest on capital leases and other lease obligations. Interest
income was $475,000 and $54,000 for the three months ended March 31, 2000 and
2001, respectively. The decrease in interest income was a result of the decrease
in the Company's cash and investment balances during the three months ended
March 31, 2001 as compared to the three months ended March 31, 2000.

PROVISION FOR INCOME TAXES.

     No provision for foreign, federal, or state income taxes was recorded for
the three months ended March 31, 2000 because the Company incurred a net loss
during the three month period. For the three months ended March 31, 2001 the
Company recorded an income tax provision of $6,000, related primarily to minimum
state income tax requirements.

LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 2000, the Company had $8.6 million in cash and cash
equivalents. In January 2001, the Company sold 5,325,645 shares of Series A
Redeemable Convertible Preferred Stock at a purchase price of $1.2628 per share
resulting in proceeds of $6.7 million, including the conversion of $1.5 million
in notes payable (the "Converted Insight Notes") to four funds affiliated with
Insight Venture Associates IV, L.L.C. (collectively, "Insight"). The Convertible
Insight Notes were originally issued in December 2000.

     On February 20, 2001, the Company issued a 9% Bridge Promissory Note (the
"February Note") and a warrant to purchase up to 108,877 shares of the Company's
common stock (the "February Warrant") to Insight for an aggregate purchase price
of $3.0 million. The February Warrant is exercisable at any time after April 30,
2001 and on or prior to February 15, 2011 at an exercise price of $2.7554 per
share.

     On March 28, 2001, the Company issued a 10% Bridge Promissory Note (the
"March Note") and a warrant to purchase up to 294,118 shares of the Company's
common stock (the "March Warrant") to Insight for an aggregate purchase price of
$1.5 million. The March Warrant is exercisable at any time after June 2001 and
on or prior to March 28, 2011 at an exercise price of $1.53 per share.

     On April 16, 2001, the Company received an undertaking letter from Insight
which included the following terms:

     o   Insight will refinance the February Note and the March Note with a new
         $4.5 million promissory note (the "New Note") which bears interest at
         12% per annum and matures on January 15, 2002 (the Initial Financing).

     o   If the Company requires additional financing to support its ongoing
         business operations, Insight has agreed to provide up to $13.5 million
         of additional financing (the "Additional Financing"). The Additional
         Financing will be available at any time from April 16, 2001 through the
         earlier of December 31, 2001 or the consummation of a "Sale of the
         Corporation" as defined in the Company's Series A Preferred Stock
         documents. Subject to the terms of the undertaking letter, the
         Additional Financing will be available provided that the Company has
         used its best efforts to obtain financing from other investors and has
         not been successful in obtaining such financing. The terms of the
         Additional Financing will be negotiated in good faith at the time the
         financing is provided, but in no event will any debt securities
         purchased by Insight have a maturity prior to January 15, 2002.

     In connection with the above, the Company has agreed to issue a new warrant
for the purchase of 681,818 shares of the Company's common stock (the
"Replacement Warrant"), which replaces the February and March Warrants. The
Replacement Warrant is exercisable at any time prior to ten years from the date
of issue at an exercise price equal to the lowest closing price per share of the
Company's common stock between February 20, 2001 and the earliest of (x) the
date of exercise of the Replacement Warrant, (y) the date of repayment of the
New Note and (z) the
                                       16
<PAGE>
date of conversion of all of the obligations outstanding under the New Note. In
connection with the Additional Financing, the Company issued a warrant (the
"Additional Financing Warrant") for the purchase of a minimum of 818,182 up to a
maximum of 1,519,091 of the Company's common shares. The actual number of shares
will be determined based on the duration that the financial commitment remains
in place. The warrants have an exercise price equal to the lowest closing price
per share of the Company's common stock from April 16, 2001 until the earlier of
(a) the date of first exercise of the Additional Financing Warrant and (b) the
earliest of (i) December 31, 2001, (ii) the date that Insight obligations, if
any, with respect to the Additional Financing, terminate due to notification
from the Company to that effect and (iii) the date of the consummation of a
"Sale of the Corporation" as defined in the Company's Series A Preferred Stock
documents. The Additional Financing Warrant expires on April 16, 2011. Based on
the Company's current cash and cash equivalents and the financing alternatives
discussed above, the Company believes it will have adequate cash to fund
operations through December 31, 2001.

     In addition, in April 2001, the Company received a $5.0 million secured
credit facility from Silicon Valley Bank. Availability under the credit facility
is based on a percentage of the Company's eligible receivables as defined. In
addition, the Company must maintain at least $2.0 million of excess availability
or cash and investments at all times. The Company anticipates utilizing the
credit facility to secure outstanding letters of credit of $2.5 million that are
currently being cash collateralized.

     As of March 31, 2001, the Company had $7.1 million in cash and cash
equivalents. Cash and cash equivalents as of March 31, 2001 decreased $1.5
million from December 31, 2000. Net cash used in operations of approximately
$6.8 million resulted primarily from a loss of $8.5 million before amortization
expense and other non-cash charges offset by an increase of $1.7 million in net
working capital.

     Net cash used in investing activities for the three months ended March 31,
2001 of $980,000 was primarily the result of property and equipment purchases
related to the increase in headcount, expansion and integration of the Company's
operating sites, and the acquisition of computer hardware and software for
development and internal operating systems.

     Net cash provided by financing activities of $6.2 million consisted of $4.6
million in net proceeds from the issuance of Series A Redeemable Convertible
Preferred Stock, $4.4 million in net proceeds from the issuance of notes payable
to Insight Capital Partners and $99,000 from exercise of the Company's common
stock options during the three months ended March 31, 2001. These contributions
were offset by the payment of $2.5 million of notes payable to former
shareholders of Customer Analytics as well as the repayment of $482,000 of
capital lease obligations.

     The Company currently has sales offices in the United Kingdom, Japan, and
Australia, in addition to the United States. The Company's revenues from
international operations have been denominated in foreign currencies which
historically have been stable in relation to U.S. dollars. As a result, the gain
or loss from foreign currency transactions has not been material to its
operating results. As of March 31, 2001, the material assets and liabilities
denominated in foreign currencies include accounts receivable, accounts payable
and cash and cash equivalents. Due to the stability of the foreign economies
where these assets and liabilities are denominated, the Company has not adopted
a policy of hedging foreign currency risks. While it is anticipated that foreign
transactions will continue to be denominated in local currencies, the Company
expects to use hedging instruments to offset potential currency exposures
arising as its international operations expand into less stable economic
environments.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The following discussion about the Company's market risk disclosures
involves forward looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
                                       17
<PAGE>
     INTEREST RATE SENSITIVITY. The Company maintains a short-term investment
portfolio consisting mainly of corporate debt securities and U.S. government
agency treasury bills and notes with an average maturity of less then twelve
months. These available-for-sale securities are subject to interest rate risk
and will fall in value if market interest rates increase. If market interest
rates were to increase immediately and uniformly by 10 percent from levels at
March 31, 2001, the fair value of the portfolio would decline by an immaterial
amount.

     FOREIGN CURRENCY EXCHANGE RISK. With sales and services offices in the
United States, United Kingdom and Australia, and a global customer base, the
Company faces exposure to adverse movements in foreign currency exchange rates.
These exposures may change over time as business practices evolve and could have
a material adverse impact on the Company's financial results. Historically the
Company's primary exposure has been nondollar-denominated operating expenses and
sales by its United Kingdom subsidiary. The introduction of the Euro as a common
currency for members of the European Monetary Union, of which the United Kingdom
is not a member, occurred in January 2000. To date, we have not noticed any
material impact from the introduction of the Euro. In addition, as the Company
expands its sales and service presence in the Asia/Pacific region in 2001, its
exposure to foreign currency exchange rate risks from the more volatile
economies of this region will increase. The Company is prepared to hedge against
fluctuations in the British Sterling, Euro, or other foreign currency if the
exposure becomes material. As of March 31, 2001 the Company's material
nondollar-denominated assets and liabilities primarily consisted of cash,
accounts receivable, and accounts payable denominated in British Sterling and
Australian dollars.

     The Company currently has sales offices in the United Kingdom, Japan, and
Australia, in addition to the United States. The Company's revenues from
international operations have been denominated in foreign currencies which
historically have been stable in relation to U.S. dollars. As a result, the gain
or loss from foreign currency transactions has not been material to its
operating results. As of March 31, 2001, the material assets and liabilities
denominated in foreign currencies include accounts receivable, accounts payable
and cash and cash equivalents. Due to the stability of the foreign economies
where these assets and liabilities are denominated, the Company has not adopted
a policy of hedging foreign currency risks. While it is anticipated that foreign
transactions will continue to be denominated in local currencies, the Company
expects to use hedging instruments to offset potential currency exposures
arising as its international operations expand into less stable economic
environments.


PART II - OTHER INFORMATION


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None

ITEM 6. EXHIBITS AND REPORTS  ON FORM 8-K.

        (a)     Exhibits

                                       18
<PAGE>
Exhibit No.     Description
-----------     -----------

Exhibit 4.1*    Certificate of Designation of Series A Preferred Stock of
                Exchange, dated as of January 10, 2001. (Incorporated by
                reference to the Company's Form 8-K dated January 10, 2001,
                filed with the Commission on January 24, 2001)

Exhibit 10.1*   Securities Purchase Agreement, dated as of January 10, 2001, by
                and among Exchange and the purchasers of the Series A Preferred
                Stock, includes all Schedules thereto. (Incorporated by
                reference to the Company's Form 8-K dated January 10, 2001,
                filed with the Commission on January 24, 2001)

Exhibit 10.2*   Registration Rights Agreement by and among Exchange and the
                purchasers of the Series A Preferred Stock, dated as of January
                10, 2001. (Incorporated by reference to the Company's Form 8-K
                dated January 10, 2001, filed with the Commission on January 24,
                2001)

Exhibit 99.1*   Form of Securities Purchase Agreement, dated as of February 20,
                2001, by and among the Company and InSight. (Incorporated by
                reference to the Company's Form 8-K dated February 20, 2001
                filed with the Commission on April 12, 2001)

Exhibit 99.2*   Form of 9% Bridge Promissory Note in the aggregate principal
                amount of up to $3,000,000 issued by the Company to InSight,
                dated as of February 20, 2001. (Incorporated by reference to the
                Company's Form 8-K dated February 20, 2001 filed with the
                Commission on April 12, 2001)

Exhibit 99.3*   Form of Warrant issued by the Company to InSight, dated February
                20, 2001. (Incorporated by reference to the Company's Form 8-K
                dated February 20, 2001 filed with the Commission on April 12,
                2001)

Exhibit 99.4*   Form of Amended and Restated Registration Rights Agreement,
                dated as of February 20, 2001, by and among the Company and
                InSight. (Incorporated by reference to the Company's Form 8-K
                dated February 20, 2001 filed with the Commission on April 12,
                2001)

Exhibit 99.5*   Form of Securities Purchase Agreement, dated as of March 28,
                2001, by and among the Company and InSight. (Incorporated by
                reference to the Company's Form 8-K dated February 20, 2001
                filed with the Commission on April 12, 2001)

Exhibit 99.6*   Form of 10% Bridge Promissory Note in the aggregate principal
                amount of up to $1,500,000 issued by the Company to InSight,
                dated as of March 28, 2001. (Incorporated by reference to the
                Company's Form 8-K dated February 20, 2001 filed with the
                Commission on April 12, 2001)

Exhibit 99.7*   Form of Warrant issued by the Company to InSight, dated March
                28, 2001. (Incorporated by reference to the Company's Form 8-K
                dated February 20, 2001 filed with the Commission on April 12,
                2001)

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<PAGE>


Exhibit 99.8*   Form of Second Amended and Restated Registration Right
                Agreement, dated as of March 28, 2001, by and among the Company
                and InSight. (Incorporated by reference to the Company's Form
                8-K dated February 20, 2001 filed with the Commission on April
                12, 2001)

Exhibit 99.9    Form of Loan and Security Agreement with Silicon Valley Bank
                dated as of April 25, 2001.






        (b)     Reports on Form 8-K

                Form 8-K dated January 10, 2001, filed on February 20, 2001.

                Form 8-K dated Ferbruary 20, 2001, filed on April 12, 2001.



































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<PAGE>


                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                        Exchange Applications, Inc.
                                        (Registrant)

Dated: May 15, 2001

                                        By: /s/ GEORGE ABATJOGLOU
                                            -----------------------------
                                            George Abatjoglou
                                            Vice President, Chief Financial
                                            Officer, Treasurer
                                            (authorized officer and principal
                                            finance and accounting officer)


































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